Stagnant Incomes Signal Curbs on U.S. Consumer Spending: Economy

Consumer purchases, which account for about 70 percent of the economy, climbed at a 1.7 percent annual rate from April through June, following a 2.4 percent gain in the first three months of the year. Victor J. Blue/Bloomberg

Sept. 10 (Bloomberg) -- Wages are stagnating as the job
market cools, restraining the consumer spending that is needed
to sustain the U.S. economic recovery.

Average hourly earnings were little changed in August from
the prior month and up 1.7 percent from a year earlier, matching
the smallest gain since records began in 2007, the Labor
Department reported last week. Payroll growth slowed to 96,000
last month, while the unemployment rate fell as more people left
the labor force.

Limited employment and wage prospects together with the
highest gasoline prices in four months are straining household
budgets after the weakest quarter for spending in a year. With
little else to spur the expansion, Federal Reserve policy makers
meeting this week are set to consider further easing to shore up
the world’s largest economy.

“Real wages are going nowhere -- something between nowhere
and down -- depending on what occupation you are in,” Alan
Blinder, a Princeton University economist and former Fed vice
chairman, said in a Sept. 7 interview on Bloomberg Radio’s
“Surveillance” with Tom Keene. “With a weak labor market --
and we have had a very weak labor market for four years -- there
is not a lot of prospect for a turnaround in that.”

The so-called fiscal cliff of U.S. tax increases and
government spending cuts that take effect at the end of 2012
unless Congress acts represent hurdles for companies considering
whether to take on more staff.

Europe’s Woes

A looming recession in the euro zone and a slowdown in
China also pose barriers as they curb demand for U.S. exports.
The Standard & Poor’s 500 Index was little changed at 1,438.05
at 10:31 a.m. in New York as concern over Greece’s debt crisis
overshadowed speculation central banks will take action to spur
the economy.

In China, imports unexpectedly fell and industrial output
rose the least in three years, signaling more stimulus may be
needed. Inbound shipments slid 2.6 percent in August from a year
earlier as exports rose 2.7 percent, the customs bureau said in
Beijing today. Production increased 8.9 percent, the National
Bureau of Statistics said yesterday.

French business confidence climbed for the first time this
year last month and factory output unexpectedly increased in
July, suggesting the euro region’s second-largest economy may
regain some strength.

In the U.S., the economic outlook is “about as uncertain
as we have seen it in a while,” Michael DeWalt, director of
investor relations at Caterpillar Inc., said last week at an
industrials and materials conference in Boston.

Average Workweek

The average workweek for employees, which means extra pay
when it lengthens, held at 34.4 hours in August after being
revised down in July, last week’s report showed.

The Bloomberg Consumer Comfort Index hovered near an eight-month low in the week ended Sept. 2.

“All of the income measures are not very pleasant,” said
Chris Christopher, director of U.S. and global consumer
economics research at IHS Global Insight in Lexington,
Massachusetts. “Wage gains have been slow and flat. There is
going to be a lot of discontent in the consumer-sentiment
numbers.”

Dissatisfied Americans watching their wallets include
Cheryl Zackery of Columbus, Georgia, who has been out of work
since April 2011 and is “not pleased with the economy.”

“I am not spending,” said Zackery, 54, who has worked in
retailing and customer-service in the past and hasn’t found a
job even after filling out 280 applications. “They are not
hiring. I am discouraged.”

Groceries, Gasoline

Costlier gasoline and groceries will take a bigger slice of
American workers’ paychecks.

“It leaves the consumer in a vulnerable position without
much income when energy prices are rising,” said Michael
Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York
and former economist for the Fed. “Without income growth, it’s
hard to have spending growth. It’s going to be tough for demand
to pick up. The economy is going to continue to struggle.”

A gallon of regular fuel at the pump was $3.82 on Sept. 6,
close to the highest since April, according to AAA, the biggest
U.S. auto group. While driving to supermarkets is becoming more
expensive, grocery prices may soon follow as the worst U.S.
drought since the 1950s ravages crops.

The lack of progress on jobs and persistent unemployment is
a “grave concern,” Fed Chairman Ben S. Bernanke said Aug. 31
in a speech in Jackson Hole, Wyoming, as he made the case for
additional monetary policy action.

Target Rate

Fed policy makers, who conclude a two-day meeting on Sept.
13, have discussed extending the period over which they’ll keep
their target interest rate low and purchasing more assets to
hold down borrowing costs.

Unemployment, which fell to 8.1 percent in August as
368,000 Americans dropped out of the labor force, has exceeded 8
percent since February 2009, the longest stretch in monthly
records going back to 1948. At the same time, households are
rebuilding savings and paring debt.

“Income growth has been a key headwind for consumers
through the recovery,” said Nathan Sheets, global head of
international economics at Citigroup Inc. in New York. “I
expect a roughly constant saving rate over the next several
years as consumers continue to de-lever, so the pace of income
growth will essentially determine the pace of consumption
growth.

‘Important Tension’

“This is an important tension,” said Sheets, who was
director of the Fed’s international finance division until last
year. “We need more income to get more consumption and we need
more consumption to get more income -- that is, stronger
consumer demand for firms to be willing to hire and pay more.”

Consumer purchases, which account for about 70 percent of
the economy, climbed at a 1.7 percent annual rate from April
through June, following a 2.4 percent gain in the first three
months of the year. The economy also expanded at a 1.7 percent
annual pace in the second quarter.

Lowe’s Cos., the second-largest U.S. home-improvement
retailer, in August reduced its full-year profit forecast and
said it expects sales to be little changed, down from a prior
projection of a 1 percent to 2 percent increase. Mooresville,
North Carolina-based Lowe’s has itself cut more than 500
corporate jobs this year after closing 27 U.S. stores.

Retailers face “a lot of macro concerns,” Chief Executive
Officer Robert Niblock said at a conference in New York on Sept.
5, citing unemployment and the uncertainty caused by
presidential elections in November. “Underlying demand will
remain soft in the near term.”